While attending the IAGC e-commerce in geophysics conference in Houston this month (see report on pages 6 and 7) I am sure that I heard a couple of speakers make what amounts to an e-biz Freudian slip. This involved the classic illusion of new businesses, that of confusing turnover with profit. I heard one speaker enthuse over the billions of dollars that were transiting through the upstream Acquisitions and Divestiture (A&D) market, with the distinct implication that a large proportion of this was to come the way of the e-market.
London Stock Exchange
Well OK, no doubt some of it will, but how much? If x billion dollars worth of business goes through a market, what is the profit made by the marketplace? Well one rather famous marketplace, the London Stock Exchange (LSE), was up for sale recently. Although the deal was not done it did expose an estimate of the value of a marketplace. This was of the order of one billion pounds sterling. A lot, but not an astronomical amount, much less than the billions of dollars that energy e-biz is going to generate.
6.5 trillion!
I got on the web and did some further digging, with interesting results. The LSE made some 34 million profit on 175 million turnover last year. But this of course is the turnover recorded in the LSEs books, what they charge clients for their services. Some more digging revealed the turnover of the LSE itself. This was a staggering 6.5 trillion in 2000. Now mapping a stock market across to a vertical e-biz is far from a perfect fit. I would have liked to do further research on cattle, or fruit and vegetable markets, but will simply observe that the people running them dont look as though they are in the billion dollar category!
Salomon Smith Barney
If we take the ratio of the LSEs overall turnover ( 6.5 trillion) to marketplace profit ( 20 million) we have a rather sobering ratio of 1:325,000. For fun, lets map that across to some E&P disposal market values. A survey by Salomon Smith Barney last year put the upstream A&D market at $30-50 billion annually. Taking the upper figure, and applying the LSE ratio of market value to marketplace profit this implies profits to all the market owners of an under whelming $ 140,000.
Wrong?
One thing is of course wrong with this analysis. Most of the profit made in share trades is not made by the marketplace, but by the market makers - the brokerage houses. More surfing revealed that the overall commission rate for UK equity business is 0.15%. This gives a marketplace turnover to market maker turnover ratio of a more respectable 1:667. In other words, the E&P A&D market makers turnover becomes $75 million. With a reasonable amount of competition, well run businesses could be expected to translate this into profits of the order of $10 million. Still rather a modest figure for the world-wide A&D market.
Baird
Similar fundamentals have been behind the failure of many dot coms recently. A propos of this, Schlumberger CEO Euan Baird comments As the dot.com technology bubble fades it is becoming increasingly clear that the winners in the Internet age will be companies with excellent products and market shares in specific verticals who are able to aggressively enhance their business model with these new technologies. Indeed, if you have a business like Schlumbergers you should indeed be able to leverage it through the internet. But for the rest of us, is the internet just a technological veneer around traditional activity? Or are there still opportunities for quantum change and completely new businesses?
Processive interpretation
In my own modest contribution to the IAGC proceedings I argued that there were indeed lots of such opportunities emerging. For geophysics, many of these will apply to the frayed boundary between processing and interpretation. I ventured that bandwidth could provide much greater integration between your unstacked, off-site data and your interpretation workstation. That there was a real opportunity here to provide a multitude of new services such as pre-stack depth migration on demand, AVO, rapid access to partial gathers and management of such complex datasets. All facilitating a move from interpretive processing to processive interpretation.
Cap Gemini
Randy Alexander of Cap Gemini Ernst & Youngs analysis of transaction types was interesting in this context. Most all of the portal, procurement and marketplace type business falls into the low margin area of e-commerce. It also requires multi-party agreement on the standards and protocols to be used - which historically has proved hard to reach. On the other hand, the high tech, bandwidth-enabled processes fall into the attractive high added value category. But what is even better, you only need standards and protocols agreement between the contractor and the client to get up and running. Could the integration of high tech processing into the interpretation workflow be the real low hanging fruits of geophysical e-business?
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